Incentives for non-bank consultants exposed: 'Sell an expensive mortgage and win a sparkling vacation in Las Vegas'

While mortgage consultants are prohibited from receiving commissions and payments 'on the side' as part of their work with banks, this is not the case in non-bank credit. These days, companies in the industry are competing for mortgage consultants, and the way to do so is not only through payment for the very act of referring clients to them, at a rate of 0.5%–1% of the entire deal, or payments of 5,000–10,000 shekels or more to the consultant — but also through flights for a vacation abroad.

Although non-bank credit accounts for only about 3% of the mortgage market, in a market of 660 billion shekels, according to the Bank of Israel, the result is 13–20 billion shekels of borrower funds who are not always aware of the interests behind the advice they received. A number of consultants admitted in a conversation with Globes that when companies offer them a flight, it can tip the scales: "The benefits encourage me to go to one company versus another. It creates a conflict of interest," says one of them. Yonatan Berliner, a mortgage consultant, adds: "Vacations abroad can cause a consultant to prefer a certain company where he is almost at the target and route another loan there. This is a harm to the client," he warns.

"Everyone is dragged along"

While the promotions are not new, as mortgage consultant Meir Wieder explains, in the past they focused on financial bonuses and today we also see events, vacations, trips, and prizes. "The slowdown in housing transactions has changed the mortgage market. When there are fewer transactions, every client who comes to the financial institution becomes more significant," he says. A source familiar with the details of the market claims that the non-bank companies would prefer to give up these flight promotions, but according to him, "the moment one company launches a promotion, all the others are dragged along, because otherwise they will lose deals."

Thus, the company Mimun Yashir offers consultants to take off "for the most sparkling vacation there is in Las Vegas" in November. The company even urges consultants: "This is the time to increase speed and secure your ticket." It is, of course, not the only one. At freesbe mortgages from the Carasso group, they offer consultants a flight in November to Tanzania and Zanzibar: "Only 20 points and you are on the plane." The company Loanwise offers in October an equally attractive destination — New York. These are just the latest examples. Alber Mortgages flew consultants to Ibiza in July, and Pama previously ran a promotion that included winning an iPad, a TV, and even a couple's vacation abroad.

To win a vacation, every consultant needs to accumulate points. The market estimates that according to the existing pricing, to enjoy a vacation abroad, it is enough to close only 3–5 loans.

The advantage of flexibility

To the question of how it is possible that people would agree to take a loan from a non-bank credit company, even though interest rates there reach even 10%–12% versus 5%–6% in banks, the industry explains that the answer is complex: first, the underwriting process (loan approval) is easier and faster than in banks. In addition, they explain that it is a solution for people who have taken loans from banks and no longer receive approval from banks for an additional loan.

Another reason is that banks are prohibited from giving a mortgage whose monthly repayment amount would be more than 40% of the borrower's disposable income, or a borrower who wants to take a loan of more than 50% against his existing apartment (LTV financing rate limit). In the non-bank sector, companies show more flexibility.

Another area where non-bank entities enter is a person who has taken several loans (for example, to buy a car) and wants to reschedule the loans as part of the mortgage for a long term and thereby reduce his monthly repayment.

So why is all this happening right now? The market explains that even the financing promotions of recent years, such as 80/20, push some of the buyers to non-bank credit. Now, when the time has come to pay the contractor the balance that was deferred three years ago, people who did not raise enough money find themselves in a bind. In order not to pay a draconian cancellation penalty of 10%-20% of the apartment's value and remain without an asset, they turn to expensive supplementary financing in the non-bank market.

Berliner suggests being careful about this: "Each case is individual, and a separate calculation must be made, but in the vast majority of cases, since the interest rate in the non-bank sector is high, and on top of it are added an opening fee and an early repayment fee that are higher than in the banking system, it will usually be higher than the entire penalty to the contractor. Therefore, as a rule, anyone who has performed an 80/20 deal, and cannot complete the deal in the banking system, it is better for him to cancel the contract and pay the penalty to the contractor."

Will the trend intensify?

Now, this trend may expand following a circular published by the Bank of Israel regarding restrictions on housing loans. Alongside the easements, the instructions also include a tightening of credit conditions. One of the key changes concerns the ratio between the total debt repayments of the household and its disposable income. Thus, starting in October, the total repayments for housing loans — for purchase, renovation, or any purpose — shall not exceed 50% of the household's disposable income. Alongside this, in the event that the repayment rate exceeds 40% of the total disposable income, the bank will be required to allocate a risk weight of 100% to the loan, which may make the credit more expensive.

Avi Yusupov, Deputy Chairman of the Mortgage Consultants Association, says that the change may lead borrowers to seek credit outside the banking system: "This will bring more clients who want loans for any purpose to the non-bank sector at high interest rates." In cases where a client will have difficulty receiving an additional loan from the bank, according to him, "the non-bank companies can offer to transfer the entire loan portfolio to them."

Responses

As revealed in Globes, the Capital Market Authority has been working in the last year to stop the loophole of incentives for consultants. The draft published two and a half months ago is in the stages of examining public comments. The Authority announced then that it intends to clarify that the compensation to mortgage consultants will come "from the client only" and it will also prohibit "financing of conferences, advertising, training, or any other benefit with economic value."

"While the Capital Market Authority is working on setting a prohibition on non-bank credit entities to pay benefits to mortgage consultants, we are witnessing on the ground a fire sale of the clients' interests," explains Adv. and CPA Ella Tamir Shlomo, Director of Financial Regulation at Lobby 99. "As a rule, the entry of non-bank credit entities into the mortgage market is welcome and may increase competition and benefit the borrowing public. However, the mortgage marketing model of those lenders, based on paying commissions to consultants, may create increased and artificial demand for credit, harm the borrowing public, and create systemic risks, therefore we at Lobby 99 turned to the Capital Market Authority more than a year ago with a demand that it close the loophole."

From the Capital Market Authority it was stated in response: "The issue of incentives paid to mortgage consultants by non-bank credit entities is in advanced stages of examination. In these days, the comments received from the public on the subject are being examined, before formulating and publishing the final instructions. At the same time, the issue illustrates a broader need for regulation in primary legislation of the mortgage consulting field, which is not under the Authority's supervision, as well as a broad look at the entire mortgage market."

From the Mortgage Consultants Association it was stated: "The Association calls on the Capital Market Authority to quickly promote the draft regulation. Because of the dissolution of the Knesset, the legislative process stopped before the vote in the first reading and we hope that the rule of continuity will be applied to the bill."

Mimun Yashir: "This is a competition open to all mortgage consultants, as part of a normal business move accepted among all companies in the industry. Also, the company strictly adheres to the provisions of the law applicable to it."

Loanwise stated: "The company acts and will continue to act in accordance with all laws, regulations, and procedures applicable to it, and does not deviate from the legal, accepted, and practiced marketing practices in this industry — and in other industries such as the insurance industry — for many years."

From freesbe no response was received.